ASIC extends CFD trading restrictions for five years as Retail losses reduced 91%
Australia financial regulator ASIC has announced that it has extended its product intervention order imposing conditions on the issue and distribution of contracts for difference (CFDs) for a further five years, to 23 May 2027.
ASIC first announced the new CFD rules in late 2020, basically mimicking what regulators imposed in the EU and UK in mid 2018, and they went into effect just over a year ago, on 29 March 2021. The restrictions centered on limiting leverage that brokers could offer to Retail clients in trading CFDs, introducing negative balance protection (i.e. Retail clients can’t lose more money than they deposited to their accounts), and certain marketing restrictions like banning trading credits and rebates or free gifts to clients.
In justifying its decision to extend the CFD trading rules (although interestingly ASIC didn’t seek to make them officially permanent), the regulator cited that since 29 March 2021, the product intervention order has strengthened protections by reducing CFD leverage available to retail clients and by targeting product features and sales practices that amplify retail clients’ CFD losses. ASIC’s extension of the product intervention order ensures that CFD protections in Australia remain in line with those in force in comparable markets elsewhere.
ASIC also released today Report 724 Response to submissions on CP 348 Extension of the CFD product intervention order. The report summarises ASIC’s analysis of the impact of the order, using data from over 60 CFD issuers. It highlights the key issues raised in submissions to Consultation Paper 348 Extension of the CFD product intervention order (CP 348) and details ASIC’s responses to those issues.
ASIC found that the product intervention order has been effective in reducing the risk of significant detriment to retail clients resulting from CFDs. For instance, ASIC observed during the order’s first six months of operation:
- a 91% reduction in aggregate net losses by retail client accounts (from $372 million to $33 million aggregate net loss per quarter on average)
- 51% fewer loss-making retail client accounts per quarter on average
- an 87% decrease in margin close-outs affecting retail client accounts per quarter on average, and
- an 88% reduction in negative balance occurrences for retail clients per quarter on average.
ASIC Commissioner Cathie Armour said,
‘We have seen a substantial reduction in harm to retail clients resulting from CFDs as a result of ASIC’s product intervention.’
‘Our extension of the product intervention order for five years will ensure that the leverage ratio limits and other protections can continue to reduce the size and speed of retail clients’ CFD losses. These consumer protections are more important than ever during volatile market conditions.’
A CFD is a leveraged derivative contract that allows a client to speculate in the change in value of an underlying asset, such as foreign exchange rates, stock market indices, single equities, commodities or crypto-assets.
The product intervention order came into effect on 29 March 2021 after ASIC reviews in 2017, 2019 and 2020 found that most retail clients lose money trading CFDs. The order imposes restrictions on CFDs issued to retail clients, including:
- leverage ratio limits ranging from 30:1 to 2:1
- standardisation of margin-close out rules
- negative balance protection
- prohibitions on offering or giving of certain inducements (refer 20-254MR).
In addition to the product intervention order, ASIC’s actions to address concerns about CFDs include:
- enforcement action to address misconduct (for example, refer 21-119MR, 21-051MR and 20-246MR)
- public warning notices and other statements
- surveillance projects and thematic reviews
- stronger regulations
- retail client education campaigns and guidance for CFD issuers.
ASIC’s report on the impact of the CFD rules can be downloaded here.